Dynamic Inventory and Pricing Policy in a Periodic-Review Inventory System with Finite Ordering Capacity and Price Adjustment Cost

Baimei Yang,Na Liu,Liang Xu,Chunyan Gao

doi:10.1155/2015/269695

Abstract

We consider a dynamic inventory control and pricing optimization problem in a periodic-review inventory system with price adjustment cost. Each order occurs with a fixed ordering cost; the ordering quantity is capacitated. We consider a sequential decision problem, where the firm first chooses the ordering quantity and then the sale price to maximize the expected total discounted profit over the sale horizon. We show that the optimal inventory control is partially characterized by as, s′, ppolicy in four regions, and the optimal pricing policy is dependent on the inventory level after the replenishment decision. We present some numerical examples to explore the effects of various parameters on the optimal pricing and replenishment policy.

Highlights

Traditional literature on the multistage inventory system mainly focuses on replenishment decision with or without setup cost
We show that the optimal inventory control is partially characterized by a (s, s󸀠, p) policy in four regions, and the optimal pricing policy is dependent on the inventory level after the replenishment decision
We study the effect of the setup cost K on the optimal inventory and pricing policy

Summary

Introduction

Traditional literature on the multistage inventory system mainly focuses on replenishment decision with or without setup cost. Zhang et al [3] consider a single-item, finite-horizon, periodic-review coordinated decision model on pricing and inventory control with capacity constraints and fixed ordering cost. They show that the profit-to-go function is strongly CK-concave, and the optimal policy has an (s, S, P)-like structure. They study a periodic-review inventory system with setup cost and finite ordering capacity in each period They show that the optimal inventory control is characterized by an (s, s󸀠, p) policy in four regions of the starting inventory level.

The Model

The Optimal Policy

Numerical Tests

Conclusions